S. Korea’s risk premium falls to pre-crisis levels

South Korea's credit default risk has dropped to levels seen before the 2008 financial crisis erupted, mirroring its solid economic fundamentals, data showed Tuesday. 

The credit default swap (CDS) premium on the country's five-year Treasuries came to 65 basis points as of Nov. 2, the lowest in more than four years since the 64 basis points tallied in May 22, 2008, according to the Korea Center for International Finance (KCIF). 

The spread on CDS reflects the cost of hedging credit risks on sovereign or corporate debts. A steep rise indicates a deterioration in the credit of government bonds and higher costs for bond issuances. A basis point is 0.01 percentage point. 

The figure had spiked to as high as 699 basis points in Oct. 27, 2008, in the aftermath of the collapse of the Lehman Brothers, which sparked the global financial meltdown. 

The CDS premium had hovered around 85 basis points early October, before it dropped by more than 20 basis points within a month, following the consecutive sovereign rating upgrades on Korea by global appraisers including Moody's Investor Service Inc.

No further aggravation of the eurozone debt turmoil and waned fear over a hard-landing of the Chinese economy have given relief to the global market, according to market watchers.

"The overall CDS premium for Asia dipped on eased concerns over the China factor. We could expect the CDS premium for Korea to drop to as low as 30-40 basis points in the long term," said Yoon In-gu, a KCIF economist. 

Other credit risk barometers also showed a sharp decline. The spread on foreign exchange stabilization bonds due in 2019 fell to 38 basis points, the lowest since 2009. The yield refers to the return on the Korean Treasuries that are added to the U.S. government bonds in the global financial market, a gauge of the sovereign credit. It gets lower as the sovereign risk wanes. 

"A fall in the risk premium means a favorable condition for the local bond market, as it can lure more investors from abroad," said Lee Seung-hoon, an analyst at Samsung Securities Co. 

Meanwhile, the Oct. 2 CDS premium for Korea came lower than those for Japan and China, which stood at 73 basis points and 66 basis points each, according to KCIF data.

(Yonhap News)